ATO to respond to judgment on CBA hybrid

The High Court ruled that the structure of Perls V was the most cost-effective option for Commonwealth Bank of Australia to raise funds and the fact that investors benefited from franking credits was merely incidental.
Photo-illustration: Karl Hilzinger

The Tax Office expects to release a decision impact statement early in the new year on the
Commonwealth Bank
’s landmark High Court win over the franking of dividends from its $2 billion Perls V hybrid.

The ATO has usually approved hybrids for tax purposes, but the form of Perls V – a stapled security issued in August 2009 as debt in New Zealand, and franked equity in Australia – raised the ATO’s suspicions that Perls V was being issued to avoid tax.

An assistant commissioner of the ATO told a briefing at an Institute of Chartered Accountants tax conference in Sydney on Friday they were considering the possibly wide-ranging implications of the judgment.

The ATO’s understanding of what “incidental" means is one important factor.

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The Tax Office has understood that if it can prove the tax benefit gained from a transaction is anything greater than “incidental" to the reason for the issue, it can be argued to be a “substantial" purpose, and therefore done to avoid tax.

Assistant Commissioner Graeme Hager said it appears the High Court decision is saying if the “purpose, however substantial, is just a natural consequence of the dominant purpose – in this case the raising of Tier 1 capital – then it will always be incidental".

Given the time required to consider the structure and tax treatment of hybrids, he urged any companies planning to issue a hybrid to tell the ATO as early as possible.

“There are usually commercial time pressures," he said. “I think it is even better [for the issuer to tell the ATO they] may go to market at some stage in the future. It gives us an opportunity to marshal our resources."

In 2009, CBA agreed to pay the $45 million of tax payable to the ATO in the event it lost the case, in order to allow Perls V to go ahead with franking credits to investors.